Posted by DJ-nyc on June 24, 2011 at 08:45:12:
Yes, Cash is king right now. Buying Sub 2 is the best low risk strategy right now. I am looking to offer Sellers cash for their deed (form alliance and create a win win situation). Just have to find the right motivated Seller. Now it’s creative Real estate for real.
DJ-nyc
Structuring Purchase of First Investment Property - Posted by Redemption
Posted by Redemption on June 16, 2011 at 02:02:07:
*SFH under contract $60k w 20%down trad loan @ 4.625% 30 Yr
*Seller pays $5K closing costs
*Estimate repairs/updates $25K
*ARV $150K (based on comps)
*Monthly rent $1100
We can use cash for down payment and HELOC (4.25%) for repairs or put everything on HELOC. We have excellent credit. Don’t really want to use credit cards. Since the mortgage payments would be so low ($300/mo PITI), we’d prefer to hold this property but am rather uncomfortable having HELOC balance long term. Any advice on better ways to finance this?
Re: Structuring Purchase Investment Property - Posted by Chris in FL
Posted by Chris in FL on June 17, 2011 at 14:41:08:
I will play devil’s advocate, and give my contrarian view. The HELOC and mortgage are both under 5% - leave them alone, and pay minimums only. Any investor worth their salt can make way better returns on real estate than that, so use your cashflow to build some reserves, then to invest in more deals. If your HELOC get all the way up to double digits, then you might consider paying it off faster, since you can get double digit ROI with no work or risk involved. Personally, I can’t understand why anyone would want to pay off low rate debt fast, at a time when real estate prices are so low, and rents so high (and especially if it is only your first one).
Best wishes,
Chris in FL
Re: Structuring First Investment Property - Posted by Sailor
Posted by Sailor on June 16, 2011 at 20:59:03:
If the potential rent is $1100, why not use the excess to pay off the HELOC? Once that’s paid, take the money & put it onto the mortgage. Don’t make the mistake of putting a single one of those rent dollar$ in your pocket. You are paying far too much for this property if you take anywhere near 30 years to pay off the mortgage. I always plan to pay off in 8-12 years. There’s no more fun to be had 12 times a year than having rental income from free & clear properties. I recommend you go back to your lender & see what rate they would give you for a 15 yr. mortgage, & then still pay extra every month toward the principal. That is guaranteed magic on the amortization tables.
What’s your End Game? - Posted by DJ-nyc
Posted by DJ-nyc on June 16, 2011 at 17:01:13:
Are you selling it after rehab or long term hold. You mentioned being uncomfortable with long term heloc. What’s your end game?
DJ-nyc
Re: Structuring Purchase Investment Property - Posted by Sailor
Posted by Sailor on June 17, 2011 at 16:20:46:
OK, I’ll explain a bit further. Renting $$$ is expensive especially over multiple years, even w/low interest rates. Paying interest can make even a terrific deal less than great. Yes, if one is very young & has the discipline to set aside the extra rental income toward a dp on another property, that could be justified. Most folks don’t fit both those criteria, especially if they are inexperienced. As one ages, investment strategies should be re-evaluated regularly. I plan to die w/out any debt. Actually, I was mortgage-free for many years, but then reassessed my strategy when I realized I was going to have to provide retirement plans for 2 middle-aged children married to unemployed spouses. That’s when I bought additional properties w/short-term mortgages, planning to let the tenants pay them off in just a few years, leaving sufficient income for my daughters when I’m gone. So far the plan has worked & I have generous equities in everything encumbered. I’m even older now, so in this stage of life I’m likely to either forgo much additional REI or return to ca$h purchases. Although I don’t recall ever taking out more than a 15 year mortgage, when I was young I leveraged like crazy because that was the best strategy then. Now that is absolutely the last thing I would want now, especially in a depreciating mkt.
My primary point is that there are options available, & that different strategies are appropriate for different folks at different times in their investment lives & in different markets. Although I can’t resist a sizzling deal, for me, REI holds little appeal right now because there is no real pay-off for me unless I run across a good flip. I AM considering buying a rental to put in the name of my favorite philanthropy so that my work can continue. That I find interesting, but just day-to-day REI, not so much.
Re: What’s your End Game? - Posted by Redemption
Posted by Redemption on June 17, 2011 at 19:22:00:
The plan was to sell it as a lease purchase with a trust, giving the tenant buyer 5-7 yrs (or more) to perform (if they ever did or get another TB in there). But, I reposted today that this Fix & Hold deal turned into an assignment due to structural issues. I’d appreciate answers to my qu’s on that post. Thanks!
Re: Structuring Purchase Investment Property - Posted by Chris in FL
Posted by Chris in FL on June 17, 2011 at 17:40:41:
Obviously different things work for different people, and at different ages. However, poster said it was their first investment property. To me, accumulate and grow - don’t pay down low rate debt. Agreed - you must have the discipline to follow through. Personally, I am still in growth stage, but not far from shifting gears. Also, until very late in life, I argue against all free and clear. Reason - ROI on free and clear houses is very low… Generally less than 10%. ROI on leveraged houses, done correctly, is much higher. A position of all free and clear property may not even keep up with inflation, especially with our governement’s ideas of deficit spending and “printing” money (QE - ‘just add a few zeros’!). Leveraged property getting paid off builds in cost of living increases. Some will argue that increasing rents keep up with inflation, and that may help some, but I think much of rent increases just keeps up with higher taxes, insurance, cost of repairs, etc. Pete Fortunato says (and I think fairly accurately) something along the lines of: 30 years ago T&I and repairs ate up 1/4 of a property’s rent (so 3/4 of a free and clear property was profit). 15 years ago T&I and repairs ate up 1/3 of a properties rent (2/3 of free and clear property’s rent was profit). Today T&I and repairs eat up 1/2 of a properties rent (1/2 of rent is profit). I still love what buy and hold real estate can do, but just some food for thought as to when is a good time to aim for all free and clear…
Best wishes,
Chris in FL
Re: Structuring Purchase Investment Property - Posted by Sailor
Posted by Sailor on June 17, 2011 at 20:27:39:
I agree about the ROI on leveraged properties if you are buying stick-built. However, that is @ least partially offset by the hassles & expenses of renting your money. I’ve always preferred bread n’butter rentals, so in 2005 I switched to MHs, which is bread n’butter in my rural area. Folks dream about living in a DW. I get the same or almost the same rent as stick-built, but my investment is significantly less. MH’s don’t appreciate, so the strategy is to buy low (I have several $500 deals, though those didn’t include the land). However, most stick-built aren’t appreciating either, so that blows half the advantage of leveraging those, too.
I don’t expect anyone to adopt my model. My only thought is that we all have to stay on our toes & not only think through our various strategies, but be ready to change as our lives & the mkt change. There’s lots of ways to do REI, many wrong, but quite a few right. For any new investor I recommend several things: (1) Read ALL the Archives; (2) Read ALL of Lonnie Scruggs’ books (available on this site; (3) keep one spouse in a job w/benefits, 'cause no matter how much $$$ you make in REI, you cannot buy those; (4) live below your means; (5) invest the maximum in your IRA; (6) always remember that renting $$$ is co$tly; (7) pay extra, even if only $5, on every mortgage payment; (8) plan on burning the mortgage your residence prior to retirement; (9) don’t get divorced; & (10) give back to your country & community.
Re: Structuring Purchase Investment Property - Posted by Chris in FL
Posted by Chris in FL on June 17, 2011 at 22:50:51:
Sailor,
Very good stuff indeed! You are a good egg. I started long ago talking about 3 rules: #1 - live below your means #2 - save and invest the difference #3 - continuously improve on rules #1 and #2… Follow those three rules, and no matter where you start, you will eventually be wealthy! Right now, in my area, you can get houses, and even block houses, with very good positive cash flow… I have a few mobile homes on land, that made good cents when I bought them, but I can hardly justify purchasing a mobile now, when I can buy decent houses in the $20-30K range including repairs. Definitely have missed the benefit of great health insurance since I quit the JOB, but as far as retirement plans go, my real estate wealth easily surpassed my 401K/Roth IRA, long ago, and many times over. Then, on renting money being costly, that is my one major point of dispute. To me renting money makes me wealthy. Every dollar borrowed is covered by investment income (rental profits after all expenses)… Renting money to buy cash flowing real estate is residents buying houses for me, providing me cash flow, tax advantages, usually instant equity when I buy, and eventually appreciation (it will happen again some day). Nothing costly about it. If I can buy a million in positive cash flowing real estate, with a million in rented money, it is just a matter of time until I am a millionaire. As I heard Robert Allen say once, a million in debt is a million in net. Just have to make sure it is managed well (and mine is)!
Best wishes,
Chris in FL
Re: Structuring Purchase Investment Property - Posted by Sailor
Posted by Sailor on June 20, 2011 at 08:05:49:
OK, just more more point to ponder. I don’t know your tax rate (note the average American is taxed, one way or the other at c. 40%). If I have to pay an extra dollar in interest, how much do I really have to earn to pay it? I figure the answer to that question makes even 4-5% annual interest un-cheap–especially since I have to re-earn the same amount each & every year for the life of the mortgage.
Amortization tables can be truly illuminating for those who spend the time w/them. Each of us has to find our comfort zone, & my goal is to just remind folks to have all the relevant facts & scenarios @ hand. Sometimes what we think is a good deal really isn’t when it all plays out. I’ve known too many folks who went bust on great deals.
Recommended reading for newbies… - Posted by Chris in FL
Posted by Chris in FL on June 17, 2011 at 23:03:06:
I read The Richest Man in Babylon once or twice a year, to refresh core ideas that one should be careful to ever get away from… Rich Dad, Poor Dad was a great book - an easy read that started many to a new way of thinking (myself included).
Read books often… I usually have a wealth/success/RE book and CDs in my vehicle, so I can listen when I drive, and read any time I have to wait for anyone or anything. You can get great ideas from many of the following authors, just make sure you screen anything you read through the “does this make sense to me and for me” filter…
Robert Allen - some of the most creative RE stuff, but also some of the riskiest ideas
Brian Tracy
Jim Rohn
T. Harv Eker (Millionaire Mind Intensive 3 day seminar changed me forever, for financial improvement, and my kid brother as well)
Mark Victor Hansen
Jack Canfield
Re: Structuring Purchase Investment Property - Posted by Chris in FL
Posted by Chris in FL on June 20, 2011 at 10:57:23:
Sailor, I agree with you on most things… Just not this one thing.
I subscribe to the Robert Kiyosaki school of thought on debt: there is bad debt, and good debt. Bad debt costs me money. Good debt makes me money. You sound like the Dave Ramsey school of thought - no debt is good debt.
When I buy a property, and the rents cover the mortgage (including principal AND INTEREST), the taxes, the insurance, all repairs, a reasonable vacancy factor, and still leave cash in my pocket, I challenge anyone who ever says that debt costs me too much. They are overthinking the debt, and not considering the end result (can’t see the forest through the trees). I don’t care if that debt is 16% hard money, if the property rents carry all expenses, I am not paying a penny out of my pocket - that debt is costing me zero, zip, nada. Further, my mortgage/debt gets smaller with every payment (residents buy the property for me). Eventually I will own that property free and clear, and the only money out of my pocket will have been any down payment I made. I also get tax benefits, likely positive cash flow, and possible appreciation later. Also, bought correctly, I can have instant equity when I buy!!!
Sailor, I like much of what you say, and I want to recruit you. Come to my area, find me deals like this that you don’t want (because of the high cost of debt), and sign them up for me. As long as they are decent properties, not in war zones, I will take every one (and sing all the way to the bank)!!!
If people get caught up in the “high cost of debt”, they will fail to realize the high power of leverage. I am getting wealthy because of my wise use of debt… Every day my wealth and income grow as my debts get paid down and my cash flow increases. Occassionally I pay extra on my highest rate debt; I almost never pay extra on my lowest rate debt. Most of my extra income is used doing two things: one, improving my family’s lives, and two, making down payments on more property with instant equity and positive cash flow (or break even under the right circumstances)… When I reach the point where further purchases seems more like ego than a means to an end (to improve our lives), then I will quit hunting for great deals, and focus on other pursuits.
Best wishes,
Chris in FL
P.S. - I have posted on here quite a bit about what I am doing now. Using private money, with 6-8 year terms, and buying SFRs. I bought 10 in the past 12 months or so, and, taken together, they about break even after all expenses (actually probably slightly positive cash flow). Is the debt too expensive? Well, my rents cover all expenses, so I pay nothing, and in 6-8 years every one of these properties will be free and clear. My average investment: 3-5K down payment per house. ROI: turning my 3-5K per house into free and clear houses in 6-8 years, and every property has at least $10K instant equity when I buy. I sure hope nobody else takes on the burdens of this high cost of debt, especially NIMBY.
NIMBY - not in my back yard (I don’t need the competition)!
I have been RE Investing for 10 years - Posted by DJ-nyc
Posted by DJ-nyc on June 19, 2011 at 10:28:56:
And I am learning alot from your Posts and the posts of others. I am a life long student.
I ready The Richest Man in Bablylon three times! (love Robert Allen just for creativity mindset but with keeping my feet planted in reality)
Thank you!
DJ-nyc
Re: Structuring Purchase Investment Property - Posted by Sailor
Posted by Sailor on June 20, 2011 at 14:56:13:
Thanks for the offer, but my next trip w/likely be transatlantic. I already bought my tent. No, I’m not a Ramsey devotee, though he has a good program for the young or unsophisticated. I have recommended it for the grown children of some of my friends.
I don’t think there is one way to do deals. The best way depends on time, place & circumstance. Note that I’ve explained my use of debt @ various times. The only time I think it is an absolute no-no is one one’s residence (& for me, boat) after retirement. What I do think is always important in debt mgt is full disclosure of co$ts to oneself. Fudge the details to others if you must, but full-on honesty to yourself & spouse. One more caveat: Always have a rational Plan B for when the tenant DOESN’T pay your mortgage.
(Sort of a P.S.) I also don’t believe in driving a car one can’t afford to buy ca$h. I’m still kicking myself for totaling my 1992 Mercury in 2010. I’d only reached 300,000 miles & was trying to match a friend’s mileage record. My replacement vehicle only has 53,000 miles on it, so I figure I’m set for life.
Re: I have been RE Investing for 10 years - Posted by Chris in FL
Posted by Chris in FL on June 19, 2011 at 17:17:34:
Great post; I am in total agreement. I am a life long student as well. Here reading and trying to pick up new tips as much as I am sharing my tips with others. Learn, put into action, then succeed. As far as real estate success goes, I am just hitting my stride. Still, at 42 years old, and starting to have a comfortable income/lifestyle, work as much or as little as I choose, future gets better and better; I am living a life many people dream of… I grew up poor, and without the combination of self help and real estate, no doubt that is what I would still be today. Ignorant that no matter how hard you work, or how smart you are, you must change your way of thinking. Now trying to give back some of the same help that got me where I am today!
Best wishes,
Chris in FL
P.S. - I read Richest Man in Babylon at least once every year; about 5-6 times so far. Plus, your statement about Robert Allen couldn’t be more perfect.
Re: Structuring Purchase Investment Property - Posted by Chris in FL
Posted by Chris in FL on June 20, 2011 at 16:30:04:
Sounds like you got it all figured out pretty good, for you… And I, for me… Different plans work for different folks. For someone with little self-discipline, or financial wisdom, Dave Ramsey is a good alternative. I had my wife’s vehicle and mine both paid for, but then when I couldn’t get a bank loan to buy a duplex, I borrowed against my truck (plus put some of my cash with it). Either side of the duplex makes the payments fine, and combined both sides support my family after all expenses. Vacancies are accounted for in my formulas - I actually count 25% of rents as vacancy and repair factor - which is probably a bit conservative, but keeps me out of trouble. With my cash flow, and the 30 units I have right now, I could handle 5-6 vacancies at once and still cash flow okay. I could handle every house vacant for a short period of time. I have never had more than 3 vacant at once, and one was a new one we just finished repairing, and in less than a month all three were filled with good residents. Obviously anyone in the rental game needs to have some reserves - be prepared to put on a new roof, replace an A/C, do an eviction and some fix up, etc. I have spoke with people that said rentals don’t work. Upon getting some details, here is an example: positive cash flow $200/month after PITI, which they spent every month. Owned it 3 years. Had to replace an A/C unit for $3K, which they couldn’t afford, so they got out - why own property when you might have to spend $3K on repairs - who can afford that? Meanwhile, had they put away their $200/month positive cash flow, $2400/year, for 3 years, they would have $7200 in the bank (plus any accumulated earnings). In addition, they would have mortgage paydown, tax advantages, possible appreciation. That isn’t a rental property or mortgage expense problem - that is a property management problem. Had they planned ahead, to replace that old A/C unit, the property would have done it easily, even twice over. T. Harv Eker says, ‘until you prove you can handle what you already have, the universe won’t give you any more.’ I would agree, that first you have to be able to manage your own affairs well, then accumulate one property with debt, bought well, and managed well. Then, if working well, add more. However, I know a ton of people that study real estate for years, and never do anything - fear, analysis paralysis, whatever you want to call it. I have to argue, at some point, you must take action and see if it works for you. Also, few better ways to accumulate wealth, starting out poor, than by wisely investing in real estate using the leverage of OPM (other people’s money). It works for me… Did it work for you? It has arguably made more millionaires than any other single wealth vehicle. There might be something to it!
Best wishes,
Chris in FL
P.S. - I hope all take our bantering about debt the right way… Not a battle, but it shows both sides of the coin, for those considering whether or not to buy and hold real estate using debt (or take on any other debt for whatever reason).
Re: Structuring Purchase Investment Property - Posted by DJ-nyc
Posted by DJ-nyc on June 20, 2011 at 15:49:26:
Hey Tye,
Are you the Millionaire next door?
(read that book too) Thanks, I appreciate your good will to your family and community posts. we need more people like you around.
DJ-nyc
Re: I have been RE Investing for 10 years - Posted by DJ-nyc
Posted by DJ-nyc on June 19, 2011 at 21:57:47:
Yes, I have been looking at other business ventures lately and nothing else allows me to make money while I sleep like real estate. I have been poor too and like you I find that being poor is a State of Mind. 
Keep giving back, knowledge is power!
DJ-nyc
Re: Structuring Purchase Investment Property - Posted by Natalie-VA
Posted by Natalie-VA on June 21, 2011 at 09:45:27:
Chris,
I agree that different plans work for different folks, but I will emphasize that the general public probably doesn’t have the financial discipline that a lot of us on this board have. Your discipline seems to have been instrumental in your success. I know mine has.
–Natalie